Taking a look at HMRC's Loan Charge

HMRC's Loan Charge has united MPs from across the political spectrum in condemning it and calling for its cancellation. The controversial measure, which has been applied retrospectively to around 50,000 self-employed workers, has seen many handed crippling tax bills. It has also been blamed for bankruptcies and the loss of homes. Here, we take a look at the Loan Charge.

What is the Loan Charge?

Former Chancellor George Osborne announced the Loan Charge in the 2016 Budget in order to target users of tax avoidance loan schemes for outstanding taxes. The schemes saw self-employed workers receive earnings as non-repayable loans instead of income, so they avoided paying income tax and national insurance (NI). HMRC says the loans count as income and should therefore be taxed.

The Loan Charge applies to loans made since 6 April 1999 if they were still outstanding on 5 April 2019, and the tax due had not been settled. Scheme users who filed their information with HMRC, or settled the outstanding tax, are not subject to the Loan Charge. However, those who did not meet the deadline have to pay the Loan Charge. It takes the total of all outstanding loans on 5 April 2019 and treats them as income received on that date, or profits arising in the tax year 2018/19. Those who have not settled must give details of outstanding loans to HMRC before the 31 January 2020 self-assessment deadline.

The impact of the Charge

The typical sum owing, according to the Loan Charge Action Group (LCAG), is around £120,000. However, HMRC disputes this figure, claiming the average figure is nearer to £13,000. Many of the contractors were IT professionals, although there are agency nurses, NHS workers and social workers caught up in the schemes. Most were assured by their employers when they entered new pay arrangements in the late 1990s or early 2000s that they were perfectly legal.

The charge has been accused of causing 'bankruptcies, damage to livelihoods and the loss of homes'. Now, the LCAG has launched a campaign for a judicial review into the charge. Commenting on the issue, Bob Neill, Chair of the Select Committee on Justice, said: 'I have seen first-hand examples of how this approach is pushing people into real financial hardship and even bankruptcy, impacting on people's health and tearing families apart under the strain.'

HMRC's response

A spokesperson for HMRC stated: 'The Loan Charge is designed to tackle tax avoidance and ensure everyone pays their fair share. It builds on more than two decades of HMRC action to challenge these schemes. The Prime Minister will be setting out more details on the government's policy agendas over the next few months.'

HMRC also warned people about using 'loan busting schemes', which claim they can help people avoid having to pay the loan charge. HMRC says that these schemes do not work, and users may end up paying more, as they will still be subject to the loan charge as well as paying the promoter's fees.

Will the Prime Minister step in?

Prime Minister Boris Johnson promised a review of the Charge when he was on the campaign trail earlier this year, but so far he has not acted since entering 10 Downing Street. Now Mr Johnson is coming under pressure from MPs on all sides, including many in his own party.

According to MPs, HMRC has failed the test of 'fairness' in how it has dealt with affected workers. Mr Neill commented: 'That is why scores of MPs and Lords, from across the political spectrum, have called for the operation of the Loan Charge to be immediately suspended for a full and, crucially, independent, inquiry to take place. Once unfairness is confirmed, the Charge should be scrapped.' Those MPs calling for a review have been joined by the Federation of Small Businesses (FSB) and other groups representing the self-employed and contractors.

If you are unsure about anything to do with this charge or would like to discuss the matter further, please do not hesitate to contact us.